1. Field of the Invention
The present invention relates generally to a centralized exchange system for creating a marketplace to buy and sell financial products, and more particularly to a centralized exchange system for the trading loans.
2. Related Art
Over the past several years, there has been an explosion of computers, and thus people, connected to the global Internet and the World-Wide Web (WWW). This increase of connectivity has allowed computer users to access various types of information, disseminate information, and be exposed to electronic commerce activities, all with a great degree of freedom. Electronic commerce includes large corporations, small businesses, individual entrepreneurs, organizations, and the like, who offer their information, products, and/or services to people all over the world via the Internet.
Financial products are one of the types of products available through electronic commerce activities. Consumer loan products, one example of financial products available through electronic commerce, are typically divided into two categories--conforming (or conventional) loans and non-conforming (or non-conventional) loans. Conforming loans are low risk loans and include traditional primary residence mortgage loans to consumers with good credit histories and loans to consumers who qualify under certain government-backed loan programs (e.g., Federal Housing Administration (FHA) or the Veterans Administration (VA)).
In contrast to conforming loans, non-conforming loans pose a higher risk for lenders than conforming loans. Non-conforming loans include loans to consumers with bad credit (e.g., due to bankruptcy or foreclosure), non-income verification loans (e.g., loans to consumers who have been self-employed for less than 2 years), loans for non-owner occupied properties, loans for non-conventional properties, some commercial (business) loans, and High-Loan-To-Value (HLTV) loans.
For example, HLTV loans are typically obtained by consumers, who by using equity in their homes as collateral, consolidate other (e.g., credit card) debt. These types of loans involve a lender who loans a consumer an amount of money in excess of 100% of the consumer's equity in their home. For example, an "HLTV 125" loan refers to consumer who obtains a loan for 125% of the value of their home.
In more detail, an "HTLV 125" loan would work as follows. A consumer who owns a home valued at $100,000, and has a first mortgage on that home for 80% of the value (i.e., $80,000), would have $20,000 in equity. If the consumer has credit card debts and wanted to borrow money to consolidate these debts, a lender may offer the consumer an HLTV loan. In one scenario, the consumer may be able to obtain a loan for the $20,000 equity in their home, and borrow against an additional 25% of the value of the home (i.e., another $25,000) for a total loan of $45,000. As such, there would now be loans covering 125% of the value of the consumer's home.
Under the current tax laws, this type of loan provides the consumer (i.e., borrower) with a tax advantage because a certain amount of the interest paid on this loan can be deducted on the borrower's income tax returns. In contrast, any interest paid on credit card debt cannot be deducted. Further, the interest rate that a borrower may be able to obtain for an HLTV loan is often less than the interest rate charged by most credit card companies. Thus, consolidating by obtaining an HTLV loan, lowers the borrower's monthly payments and allows the borrower to repay debts owed more quickly. As such, these types of loans are often attractive to consumers.
Non-conforming loans generally are also attractive to lenders because the market will often allow lenders to charge a higher interest rate than on a conventional first mortgage loan (although this interests rate is still lower than that charged by credit card companies). Because lenders are offering the borrower a loan for more than the value of the collateral (e.g., the borrower's home), however, there is a certain amount of risk involved in making such loans. As such, lenders have developed certain rules (based on criteria, such as underwriting criteria) to minimize their risks (i.e., exposure) when making non-conforming loans.
An example criteria used by lenders include identifying potential borrowers in a certain income bracket. This income bracket must be high enough so that there is small likelihood of default, but not so high that the borrower is likely to prepay the loan--thereby decreasing the amount of interest collected by the lender over the life of the loan.
Another criteria often considered by lenders making non-conforming loans is the borrower's credit rating. A consumer's credit rating is an indication of their ability to pay outstanding debts. Credit rating companies, such as Trans Union Corporation of Chicago, Ill., Experian, Inc. (formerly TRW) of Orange, Calif., and Equifax, Inc. of Atlanta, Ga., collect certain information on individual consumers and assign each a credit rating based on this information.
One method of obtaining a credit rating is known as a "FICO score" which is based on a mathematical model developed by Fair, Isaac, and Company, Inc. of San Rafael, Calif. A FICO score is based on many factors including how a consumer pays their bills, outstanding debt, how long a consumer has had credit, types of credit a consumer has, and how many times a consumer has recently applied for or opened new lines of credit.
Non-conforming loans are typically made to people with relative high FICO scores, known as "A" borrowers. "A" borrowers usually either have some equity in their homes but have a large amount of debt, or they have little or no equity in their homes. "A" borrowers have credit ratings which indicate that they will be able to repay a loan.
Loans can also be extended to "sub-prime" borrowers--individuals with "B" or "C" credit ratings. These subprime borrowers have relatively lower credit scores. Loans in this case may be the borrower's first mortgage on a home, e.g., for which the borrower has a risky credit rating, but they have collateral, such as a home, which has not been previously mortgaged. Similarly, loans can also be extended to borrowers who are seeking a "jumbo" loan--a loan of $225,000 or more.
All of these types of loans, because of the various risks associated with each, command a higher interest rate than conventional loans.
Referring to FIG. 1, a time line of a typical loan life cycle 100 is shown. The first phase in the loan life cycle 100 is a marketing phase 104. In marketing phase 104, marketing companies target certain potential borrowers to receive advertisements offering loans. For example, potential borrowers may be targeted by geographic region (e.g., by zip code or area code). This advertising can be distributed through many sources, such as via telephone advertising campaigns, via mass mailings, or via the Internet.
The second phase in the loan life cycle 100 is a loan origination phase 108. In loan origination phase 108, the potential borrower contacts the lender (e.g., mortgage bank), or a broker working with a lender, by phone or electronic mail, to request a loan. Usually, this first contact between the potential borrower and the lender is telephonic, as call centers are typically set up to handle responses to the advertising campaigns. After being switched away from the call intake portion of the call center, certain information is collected from the consumer by a loan agent. The loan agent also works with the potential borrower to agree on a loan amount, interest, points, duration or term of the loan and other features of the loan. The loan agent then sends this information to a loan processor and a loan underwriter for approval. The loan processor processes the paperwork necessary for completing the loan and the underwriter makes sure the underwriting guidelines are met, and validates the interest rate and points assigned by the loan agent. If these validated terms are acceptable to both the lender and borrower, the loan is approved, and the loan agent then works with the loan closer to finalize the loan, issue a check, and forward it to the borrower.
The loan may then enter a third phase, known as a loan wholesaling phase 112. Once the lender has made the loan, they often try to sell the loan to a mortgage banker. Alternatively, a loan may be transferred within a company to a different department that handles the wholesaling of loans. Lenders may flow loans to mortgage bankers (i.e., pass a single loan at a time), or bulk loans to mortgage bankers (i.e., pass several loans referred to as a "pool" of loans). The mortgage banker then separately pools the purchased loans and advertises the loan pools to look for investors. The role of the mortgage banker is to buy loans from the loan origination organization (e.g., mortgage bank) or lender, and then pool them in such a way to make them attractive to investors. Mortgage bankers have also developed rules that they use to decide which loans to purchase and how to pool them for sale. These rules are based on many of the same criteria used by the lender in determining whether to originate a loan to the borrower. Similarly, loan origination organizations or lenders consider the rules of the mortgage bankers when making loans, so that their loans look attractive to the mortgage bankers.
The mortgage banker pools the loans and advertises to investors who may be interested in purchasing a pool of loans. For example, a typical pool may consist of 300 loans with an estimated total value of $30 million or may consist of 3000 loans with an estimated total value of $300 million. The potential investor, typically a bank, securitization company or another mortgage banker, will review the information for each loan in the pool and either accept, decline, or reserve its decision for each loan in the pool. Then, the investor may send a revised pool back to the mortgage banker with an offering price to buy the revised pool. The mortgage banker then may add other loans to the pool and resend the pool to the investor for review. This negotiation (or bidding) continues until a sale is made or rejected. The rejected loans may be used already in other pools or may be used directly for securitization, as discussed below.
Once an investor purchases or otherwise acquires a pool of loans, the loans may enter a fourth phase, referred to as a securitization phase 116. In securitization phase 116, the investor groups several pools of loans together into a larger pool, and uses them collectively as collateral to back securities (i.e., mortgage-backed securities such as bonds). These larger pools can then be offered for sale to buyers on the secondary market. Typically, these groups of loan pools are valued in the range of $50 million-$1 billion. Because the company that purchases the loan pools and uses them to back securities is personally responsible, there is a great deal of risk involved in these type of transactions.
Naturally, investors of the loan pools have developed certain rules for evaluating the suitability of the loans for securitization. However, the mortgage bankers' rules used for grouping certain loans together in a pool may be different from the rules used by the investor in deciding which loans it would like to purchase in a pool and the rules used buy lenders in making the underlying loans in the first place. For example, the mortgage banker in an attempt to sell the low risk and high risk loans together, may want to group together loans made to borrowers with high FICO scores with loans made to borrowers with lower FICO scores. However, the investor may have rules which do not allow the purchase of any pool with a loan made to a borrower having a FICO score less than a predetermined amount. As a result, negotiations between the mortgage banker and the investor must occur in order to decide on a pool and a price that is suitable to both parties. It is important to note that although the rules are devised as guidelines for buying and selling loans, these rules may be disregarded or altered on a case-by-case basis. Further, each entity described above may frequently change its rules based on market conditions and other relevant factors.
The process for selling loans or loan pools and then negotiating about the sale is currently ad hoc. Generally, an investor will learn about a pool by calling a particular seller to see what loans or loan pools are available. The seller will then send the investor information about the loan or loan pool generally on a spreadsheet, such as Microsoft.RTM. Excel. The investor may reconfigure the information into their preferred format on the spreadsheet, delete or mark those loans from the pool that they do not wish to purchase, and send the spreadsheet with the revised pool back to the seller. This process is often clumsy and inefficient, requiring a lot of manual data re-entry between the parties.
Further, there is no mechanism, apart from person-to-person (e.g., face-to-face or over the telephone) interaction, for determining what loans or pools are for sale, what rules are being used to pool the loans, and what rules are being used by the investors to determine whether to buy certain loans.
The investors service the loans, either themselves or through a separate servicing firm, and create a mortgage-backed security based on the assets (i.e., future income stream) of the pooled loans. The mortgage-backed security has an assigned interest rate based on the future capital of the pools of loans that are being securitized. The mortgage-backed securities are then generally sold, either directly or through brokerage companies, to buyers in the open market.
The mortgage-backed securities are always securitized by the pool of loans, so that the loans can never be transferred again throughout the remainder of their life cycle 100. Prepayment of loans is a problem, because if a loan is prepaid the mortgage-backed security is no longer backed by all of its original underlying assets. Companies that securitize these loans have attempted to predict the amount of prepayment of loans in the pools and work this figure into a yield, however many companies have failed because they could not accurately predict the rate of prepayment or default. There are no metrics on which these investors can base a prediction of rates of pre-payment, or also default or delinquency.
The loan also follows a separate track with the consumer, concurrently with the first track described above. As shown in FIG. 1, once the loan is approved and the money is sent to the borrower, the loan enters a servicing phase 120. Servicing phase 120 consists of a servicing company sending a coupon book to the borrower which indicates when monthly payments are due and the amount of the payment. If the borrower is late on a payment, the servicer will contact the borrower to discuss the missed or late payment. This servicing is very methodical, in that servicing companies will often have pre-set time period for certain actions. Such as, placing a telephone call to a delinquent borrower after his payment is 10 days late, and writing a letter to the delinquent borrower after his payment is 30 days late, and so on.
If the borrower becomes insolvent or delinquent in their payments, the loan enters the next phase, referred to as a claims phase 124. In claims phase 124 the servicing company may enter a claim against the borrower in a bankruptcy proceeding, or file a lawsuit in court to foreclose on the mortgaged property or secure an order to garnish the borrower's wages. Because non-conforming loans are often second mortgages and are typically made for more than the value of the underlying collateral, lenders are reluctant to enter this phase, because it generally results in the lender losing money. In particular, when a non-conforming loan is used to back a security, and the borrower defaults on the loan, the collateral used to back the security disappears. This has, in the past, lead to the demise of many of these types of securitization companies that back securities with non-conforming loan pools.
On both tracks, the loan then enters a final phase, referred to as a loan termination phase 128. Generally the loan enters loan termination phase 128 when the fixed term of the loan expires (e.g., a 30 year fixed loan) and/or the loan has been fully paid (i.e., prepayment).
Therefore, in view of the above, what is needed is a system, method and computer program product for an online (i.e., Internet, intranet, or extranet) system for buying and selling financial products. Such a system would create a "marketplace" in which investors (i.e., buyers) and sellers of these financial products could go to place their products for sale, to ascertain what financial products are for sale, and to determine what the price is in the "marketplace" for certain types of products. Further, what is needed is a system, method and computer program product that archives all of the selection and pricing information for access by its users.